Stock Analysis

Is Huhtamaki India (NSE:HUHTAMAKI) Using Too Much Debt?

NSEI:HUHTAMAKI
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Huhtamaki India Limited (NSE:HUHTAMAKI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huhtamaki India

How Much Debt Does Huhtamaki India Carry?

The image below, which you can click on for greater detail, shows that Huhtamaki India had debt of ₹2.58b at the end of June 2024, a reduction from ₹4.13b over a year. However, its balance sheet shows it holds ₹3.20b in cash, so it actually has ₹613.0m net cash.

debt-equity-history-analysis
NSEI:HUHTAMAKI Debt to Equity History December 3rd 2024

How Healthy Is Huhtamaki India's Balance Sheet?

We can see from the most recent balance sheet that Huhtamaki India had liabilities of ₹5.93b falling due within a year, and liabilities of ₹2.66b due beyond that. On the other hand, it had cash of ₹3.20b and ₹5.85b worth of receivables due within a year. So it actually has ₹457.9m more liquid assets than total liabilities.

This surplus suggests that Huhtamaki India has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Huhtamaki India has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Huhtamaki India has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Huhtamaki India's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Huhtamaki India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Huhtamaki India generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huhtamaki India has net cash of ₹613.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in ₹1.1b. So we don't have any problem with Huhtamaki India's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Huhtamaki India has 3 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're here to simplify it.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.